How lenders determine your car loan affordability

​Posted on Tuesday, December 13, 2016 - 10:50

Determining exactly how much you have in savings and whether or not it is affordable in the long run to take a loan can be a challenge for most people. When it comes to actions that require a degree of financial knowledge, it is important to inform yourself responsibly before going through with them.

One of the most asked questions is how lenders determine your bad credit car loan affordability.

In short, a creditor will see how affordable it is to lend you money by determining your income, credit rating and employment history, among other things.

So, without further ado, here are a few processes that lenders go through when determining the affordability of lending you money for a car.

Determining your income

The lenders will analyse and calculate the amount of money that you make from your sources of revenue after taxes and expenses. The expenses can be of many types, including other loans, mortgages or rent. One thing that most people are not aware of is that your credit card is regarded by lenders as an expense because the money that you have on your credit card can be considered as borrowed money.

In case you have a family, you may receive family tax benefits, and it is up to the lender to determine how many of these advantages could be classified as “income.” Take note that this might apply to other types of benefits, such as pensions and revenues that you make from renting. Consult with a professional financial broker if you have any questions regarding this aspect.

Determining the surplus

Once the process above is finalised, this will leave you with a surplus. But, here is the catch: the surplus must be higher than the amount of money you will be paying on a monthly basis until you fulfil your debt.

If you do not fit this criterion, you will not be qualified for the loan. Some lenders might accept a symbolic surplus of 1 dollar, while others will not.

Employment history

Another thing that lenders usually consider before lending money is the client’s work history.

An individual with a stable, full-time job is more qualified for receiving a loan than an out of college student working part-time. At the same time, he will have a lower interest rate on the loan.

Having a relatively well-paid job for a long time will inspire more confidence in the lenders that you are able to meet your end of the deal. There is also another fact to consider: having a job, especially one that requires the person to be on the road constantly, will make the lenders more willing to give out a loan for a motor vehicle.

As you can see, determining the affordability of the car loan can be a complicated and relative process, both for the client and the lender. So, are you planning to take a car loan in the near future? Do you think you qualify for one?